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5 Questions to Ask Before Investing in Australia’s Cannabis Boom

Sydney, Australia - March 5, 2014: An office worker crossing a road is reflected in the glass display of a trading screen at the Australian Stock Exchange on Bridge Street.

Ever since Australia moved to legalize medical cannabis, dozens of Australian companies have bloomed and boomed, with shares climbing in value as Australian state governments continue to relax regulations.

But what about the risks still lurking in the nascent market? To succeed, these companies rely heavily on continued government reform. To avoid getting burned, investors should do their homework. Here are a few questions to get started.

1. How Long Will It Take the Company to Get up and Running?

Applicants are first required to obtain a government-issued license. Then they must build a facility, be certified the Department of Health’s Therapeutic Goods Administration, and nail down other required permits. Only then can they begin growing cannabis—and presumably, bringing in revenue.

These steps can be laborious and needs to be navigated carefully. Investors should be on the lookout for companies with low overheads and enough capital to survive a waiting period that tends more to years than months.

2. Once the Company Is Producing Cannabis, What’s the Procedure for Turning It Into Medicine?

Under Australia’s strictly pharmaceutical framework, cannabis needs to be processed into medicine before it can be prescribed by doctors or delivered to patients. The Therapeutic Goods Administration controls medicine listings and has a rigorous process for listing new ones. Any company looking to create a new pharmaceutical would need to subject it to clinical trials, which can take years and cost millions of dollars.

3. How Will the Company Sell Products at a Competitive Price?

Australia’s incredibly strict rules for medical cannabis require indoor grow operations and a range of high-security measures. Add to that the high cost of doing business in general in Australia, and you’re looking at very pricey plants. Raw cannabis material used to produce pharmaceuticals are more likely to come from low-cost markets such as India or China.

Patenting strains, however, could create a viable and cost-effective way to produce novel strains—for example, ones that churns out high concentrations of some of the rarer cannabinoids. But that could require a sizeable R&D budget and specialty plant scientists, boosting overall expenses.

4. How Will the Company Compete With Large, Global Pharmaceutical Makers?

This is a tough one, as there aren’t many good answers to this question just yet. The supply chains, intellectual property, expertise. and market presence of massive pharmaceutical companies make for a tough competition. Giants will likely dominate the industry as soon as medicines come lose patent protections, as is common for most medicines.

5. How Will the Company Compete With Synthetic Cannabinoids?

It’s a fact of the market that very few pharmaceutical products continue to use whole cannabis plants as inputs when they can manufacture largely similar medicines through industrial processing.

This is nothing new in health care. One classic example is that of salicylic acid, commonly used to treat warts, psoriasis, acne, and dandruff. Once obtained from the bark of willow trees, it is now cheaply synthesised and manufactured in factories. As advances are made in synthetic cannabinoids, it isn’t hard to imagine some cannabis greenhouses going the way of willow tree plantations.

The Bottom Line

Despite widespread support for the decriminalization or legalization of cannabis, Australia’s only legal cannabis market for the foreseeable future is pharmaceutical. Australian companies seeking licenses to grow or process cannabis need a plan to operate in a global pharmaceutical framework marked by heavy regulation. Without that, even the meteoric gains seen by some Aussie cannabis stocks could turn out to be just a pipe dream.

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